Public Pensions at Risk Worldwide

December 10, 2014

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That's the conclusion of a report Monday from the
Organization for Economic Cooperation and Development, a Paris-based group
representing the world's developed countries. With populations aging and
lifespans rising, government-supported pensions are cutting deeper into
national budgets, crowding out spending on other programs and services. The
added burden comes as the economies of the developed world are growing slowly, putting
added pressure on the tax revenues needed to pay rising pension costs.

The solution, according to the OECD report, includes
boosting retirement ages, cutting back on early retirement and providing
greater incentives for workers to save for their own retirement, including
automatic enrollment in private plans.

In the U.S., much of the debate over pension reform has
centered on the national Social Security trust fund, which has enough
reserves set aside to fully cover its costs until 2027. Congress has debated a
series of reforms that would extend the plans solvency, including raising
contributions, indexing cost of living increases and taxing benefits.

State and local pensions are in much worse financial shape.
A report in September by bond credit rater Moody's Investors Services found
that, despite recent gains on their investments, U.S. public pension funds
don't have nearly enough money to pay what they owe current and future
retirees.

In less than a decade, that shortfall has tripled to at
least $2 trillion—more than half of all outstanding state and local bond debt,
according to the report.

Like nearly all retirement savers, state and local pension
funds got clobbered by the 2008 financial collapse. But the pension shortfall
had been building well before the downturn—and has been made worse by state and
local government's shortchanging annual fund contributions. New Jersey, for
example, took "contribution holidays" during the Great Recession and
more recently has cut payments or just skipped them altogether, Moody's said.

Without reforms, the higher cost of an aging population
threatens to stifle long-term economic growth as countries are forced to borrow
money to cover their public pension promises. In Japan, where an aging
population is experiencing the biggest gains in longevity, public debt is now
more than twice the country's gross domestic product. Despite multiple
government efforts to revive growth, Japan recently slipped back into recession
after two decades of economic stagnation.

To better manage the financial risk posed by again
populations, OECD officials want government to better communicate that risk to
investors by creating a standard, global index. The benchmark would help
investors price in the added financial burden of increases in longevity that
are often buried in outdated longevity tables and other actuarial statistics.

The group also proposed that governments issue
"longevity bonds" to hedge the risk that public pensions come up
short in covering the cost of paying out the benefits they've promised
retirees.